Markets hit by US rate rise: Fed's move rules out immediate cut in Britain and sends shares tumbling

THE US Federal Reserve sent financial markets tumbling yesterday when it moved to push a key short- term interest rate higher by a quarter-point for the third time in less than three months.

Analysts said the Fed's decision appeared to rule out an immediate cut in British base rates but an early reduction was still possible.

Although the Fed's laconic statement once more set no specific target, Wall Street assumed that Alan Greenspan, the Fed chairman, wants to nudge the Fed funds rate, at which banks lend money to each other, from 3.5 to 3.75 per cent.

The dollar rose on the news, closing 0.88 pfennigs up at DM1.7213.

Share prices on Wall Street fell sharply, with selling concentrated in areas most directly sensitive to higher rates. But the drop in the Dow Jones Industrial Average failed to trigger the trading curbs that have followed so much of the recent volatility in the share markets. The Dow index shed 41.05 points to close at 3,620.42.

The 30-year US Treasury bond, the bellwether of long-term inflation fears, was trading down about 11 2 points to yield 7.41 per cent - almost its highest level in two years - and shares of utilities and industrial conglomerates were hard hit.

A number of regional US banks raised their prime lending rate - the benchmark for most consumer lending - to 6.75 per cent from 6.25 per cent.

But the larger US 'money-centre' banks, which joined in a quarter-point increase in the Prime when the Fed acted last month, remained on the sidelines yesterday.

The news sent London shares down sharply and gilt prices slumped. The FT-SE 100 index ended 30.1 points lower at 3,138.2. Long-dated gilt prices tumbled at one stage by 21 2 points but edged back towards the close. The June long-dated gilt future ended 124 32 points lower.

The timing of the move could cause controversy. In an interview at the weekend, the Treasury Secretary, Lloyd Bentsen, predicted 4 per cent short-term rates by the end of the year, but the Fed was widely expected to do nothing in the immediate future that risked further unsettling stock and bond prices after their recent sharp falls.

The administration insists that the economy is not overheating. Economic figures point to 1994 growth in line with official forecasts of 3 to 3.5 per cent expansion.

For Fed-watchers this latest move on rates comes at an intriguing moment. Although the White House studiously avoided criticising the Fed when it pushed up rates earlier, and Mr Clinton's relations with Mr Greenspan seem smooth, the President now has a chance to make the central bank more amenable to his wishes.

Within the next few days he is due to finalise his choices to fill the two vacant seats on the Fed's seven- member board.

One is expected to be Alan Blinder, a member of Mr Clinton's Council of Economic Advisers, and the other is likely to be a woman or minority candidate. Both can be relied upon to be more growth-conscious and less obsessed by inflation than their Republican-nominated predecessors.

Mr Clinton later told reporters in Milwaukee that long-term rates should stay down if markets reacted 'rationally' to the Fed's action.

View from City Road, page 26

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Experienced Recruitment Consultant

£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent